The Weekly Update

Tit-for-tat trade rhetoric dominated market focus in what was a fairly light data week; we will continue to monitor developments and negotiations in the coming weeks with the US tariff deadline on China’s goods and services due on July, 6. US internet retailers came under pressure last week after the US Supreme Court ruled that states and local governments can start collecting currently uncharged taxes from sales made online. Closer to home, the BoE stayed pat on rates, however, appeared more hawkish with MPC member Haldane’s surprising switch from hold to hike; the probability for a hike in August spiked above 50% (to 69%) following the meeting. The central bank did note that the soft Q1’18 GDP reading was “temporary”, adding that employment remains strong.

Elsewhere, over the weekend we heard of the PBoC’s targeted 50bps RRR cut, effective July 5th. The country’s reserve requirement is amongst one of the highest globally; we could see a further cut this year to sustain liquidity as trade tensions mount and as China continues to deleverage, through medium-large financial institution debt-for-equity swaps. Following recent trade tensions, China’s Ministry of Finance has proposed a reduction in income tax, in order to boost domestic demand; via an increase in the minimum threshold. Both measures clearly prove that the nation has sufficient firepower to deploy to maintain strong and stable growth, and manage external shocks and the renminbi.

Elsewhere, markets turned to the OPEC meeting at the end of the week, where an already publicised marginal increase to the cartel’s nominal oil production was expected. Brent closed the week 2.87% stronger off the back of a smaller-than-expected increase. Also of note was MSCI’s announcement of the inclusion of Saudi Arabia in its EM basket (in phases from March 2019); and the addition of Kuwait to the 2019 watchlist for reclassification from “frontier” to EM. This effective recognition could help promote both nations, which we feel are under-represented in indices. Staying with emerging markets, Turkey had its crucial parliamentary and presidential elections yesterday, which were brought forward from November 2019 following a collapse in the lira (down ~20% this year) and deteriorating economy. No surprises that Erdogan claimed victory. In terms of market moves last week, the yield on the 10-year UST fell 3 bps, to 2.90%, while the dollar was marginally lower. Although the renminbi weakened against the greenback last week it remains one of the strongest “global currencies” so far this year, having gained 2.12% on a total return basis.

This week EU leaders gather for the summit in Brussels to discuss migration (this follows emergency talks over the weekend) and security amongst other pivotal issues. Trump-trade-tariffs will remain a main focus for markets and the US PCE report on Friday will be watched closely. A fairly quiet day today will see the release of German IFO, US Chicago Fed National Activity Index and US home sales. The two-day AIIB annual meeting on “Mobilizing Finance for Infrastructure: Innovation and Collaboration” could be of interest to some. Germany’s Merkel is due to host private talks with coalition partners on refugee policy and regional reforms. We will hear from a number of Fed speakers including Bostic and Kaplan. On the data front, the US consumer confidence readings will be of interest. Wednesday kicks-off with China’s May IP readings, in the US durable goods and capital goods orders will garner some attention, as will a number of central bank speakers including BOE’s Craney, ECB’s Praet and Fed’s Rosengren talking on “Ethics and Economics: Making Cyclical Downturns less Severe”.

Thursday’s main event will be the EU summit where: trade tariffs, asylum and migration policy, the EU budget, Brexit, EU security and reforming of the economic and monetary union will be discussed. The second part of the Fed’s annual bank stress test will be released later in the day and the central bank’s Bullard will discuss the US economy and monetary policy. In terms of data, we’ll get the third reading of Q1’18 US GDP and Core PCE qoq. A number of May inflation readings including Spain and Italy’s will be of interest, as will Japan’s retail sales. Friday’s US-China AI Tech Summit could be interesting, as could the launch of the SpaceX Falcon 9 rocket launch. EU and France's inflation, German unemployment, UK GDP and China’s CA balance will be released, however, the main event will be the US PCE report.

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